Government's shot in the arm

(Jan 3, 2009)

In this issue:
» Dual booster doses for the Indian economy
» The US toying with the idea of a 'buy American' provision
» The doomsayers were right
» A round up of the global markets this week
» ...and more!!

00:00

In a final attempt to revive the economy, before the general elections, the government has offered a booster dose by way of a second stimulus package to the ailing sectors. The package will offer a combination of easy access to credit as well as fiscal relief to export oriented businesses, cement and commercial vehicle industries that are essential to pump prime the economy. It may also be noted that the fiscal incentives announced so far will continue only until till a new government gets an opportunity to present a full budget after the general elections. The tax cuts announced in the second stimulus package would entail loss of tax revenue to the tune of Rs 400 bn in addition to the cost of the first package of Rs 310 bn. The Planning Commission believes that this would take the country's fiscal deficit to the range of 5.5% to 6% in the current financial year, nearly 2.5% higher than budgeted.

The package has also ensured that flow of credit to the infrastructure related sectors continues unhindered by allowing India Infrastructure Finance Company (IIFCL) to raise Rs 300 bn by issuing tax-free bonds to fund additional projects of Rs 750 bn. Allowing IIFCL to borrow more money from the market will help banks disburse more funds for infrastructure, helping companies achieve financial closure for key projects. Also, the government has drawn up plans to recapitalise state-run banks to the tune of Rs 200 bn in the next two years to support credit growth.

In a well-coordinated move, the RBI also responded to the government's call for easing interest rates and providing more liquidity to productive sectors. It reduced the repo and reverse repo rates by 1% each and the cash reserve ratio (CRR) by 0.5% to 5%, the lowest level since 2006. These monetary measures will inject additional liquidity to the tune of Rs 200 bn. The central bank also urged bankers to monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets.

We believe that while the RBI's monetary policy will do its bit in terms of providing additional liquidity to the economy, although with a lagged effect, the second stimulus package, like its predecessor will do little in terms of boosting the economy's prospects to a tangible extent.

01:30

Policy makers in the US too are busy scratching their heads over formulating their own stimulus package. One that will help reignite their economy in the best possible way. Struck with a patriotic streak, Obama's advisers are now toying with the idea of including a "buy American" provision in the economic stimulus legislation that the new administration will shortly be looking to implement. With such a proposal, they are hoping to save or create 3 m American jobs. The package is expected to provide tax cuts and spending on infrastructure like roads, bridges and transit systems.

People from the industry such as members of the US Department of Commerce's manufacturing council will be looking to use their positions to push for the use of domestically produced steel in such government projects. US steelmakers seem to have set their hopes on government spending as the only thing to save them from sagging demand from automakers and other industries, which fell to 104 m metric tons last year from 120.5 m in 2007.

The legislation should be in place soon after Obama's inauguration on the 20th of this month. Estimates peg the stimulus plan at a plausible US$ 850 bn, while some are in favor of as much as US$ 1 trillion. After committing some of the most outrageous financial blunders in recent times, seems like the Americans have all their hopes set on the bailout package to save them.

02:30

When the going is good, no one wants to pay attention to the downsides. But the current economic crisis has proven that at times, the doomsayers may be right after all! Money manager Jeremy Grantham (whom we have earlier quoted in The 5 Minute WrapUp), who was criticized for his seemingly outlandish prediction of the failure of Fannie Mae and economist Raghuram Rajan who was unpopular for his crude opinion about the risky developments in financial markets during Alan Greenspan's tenure, are key examples.

More importantly, these doomsayers do not see the end of the crisis very near. They envision higher taxes and the likelihood of further declines in the US stock prices as the benchmark S&P 500 index bottoms out as much as 30% lower from the current levels. Also noting that while 'deflation' is today's catchword, the experts believe that inflation and possibly even hyper inflation would bring in the crisis of the future as the Federal Reserve pumps in cheap money to revive the economy.

03:00

As large institutions are falling prey to the subprime crisis, smart investors are making sure that they get the best value deals. The US Federal Deposit Insurance Corp. (FDIC) has recently inked a deal to sell failed mortgage lender IndyMac to a group of private investment firms for US$ 13.9 bn. It may interest you to know that the buyers are none other than computer mogul Michael Dell and hedge fund guru George Soros. IndyMac's failure, one of the largest in US history, will cost the FDIC between US$ 8.5 bn to US$ 9.4 bn. The bank, which specialised in subprime loans made to borrowers who did not need to verify their income or assets, collapsed in July after defaults skyrocketed and depositors made a run on the bank. The FDIC, however, has a long way to go before things are put in order. According to the FDIC, so far only 8,500 mortgages have been restructured and another 9,480 are underway. A total of 46,500 mortgages are eligible for restructuring. There were 171 banks on the FDIC's list of troubled banks at the end of September 2008.

03:30

The enthusiasm of governments of various countries to ensure the revival of their economies had a positive effect on indices the world over. The benchmark indices in the US and UK rose 6.7% and 8.2% respectively. Asian markets too posted strong gains with the key indices in Hong Kong and Singapore posting strong gains. The BSE-Sensex ended the week with a healthy gain of 4.1% lead by strength in the metal and realty sectors.

Crude oil rose about 22% during the week as the conflict in Gaza Strip increased concerns that Middle East supplies would be cut. Incidentally this is the largest weekly gain that oil has seen since 1986. The prospects of distress in the region rose as Israeli warplanes conducted fresh attacks against Hamas on the seventh day of a bombing campaign in the Gaza Strip. The region is the source of about one-third of the world's oil. This unnerving geopolitical news has been one of the biggest factors contributing to the wild swings in crude prices. Gold prices rose a meager 0.7% for the week as the dollar climbed against the euro reducing the metal's attractiveness.

Source: Yahoo Finance

Source: Yahoo Finance

04:15

Best of this week's 5 Min. WrapUp - 2009 may bring in opportunities galore.
No we are just talking about equities but also real estate, gold and government bonds. As per global real estate consultants, Cushman & Wakefield, India may benefit from the increased fund allocation to Asian real estate sector by global investors in 2009. As per the firm, even as the total amount raised by private equity real estate funds between January and November 2008 fell by a third to US$ 57 bn from a year ago, the allocation towards Asian markets increased to 28% from 19% in 2008. As a result, funds available for investment in Asia have increased from US$ 15.9 bn last year to US$ 16.2 bn in 2008.

Gold prices rose 4% in 2008 as nearly US$30 trillion of funds invested in equities were wiped off. The fall in interest rates also spurted the demand for the yellow metal after the Federal Reserve cut its benchmark interest rate to near zero percent. As per Bloomberg, the metal has been the second-best performer in the index of 26 commodities this year, behind cocoa. Going forward, economists expect uncertainty over performance of other asset classes to continue to attract money to gold from investors seeking to diversify their portfolios.

Indian long term bonds are expected to have their best year in 2009 since 2001 as cooling inflation will allow the central bank to further cut interest rates. The benchmark 10-year yields slid to the lowest since May 2004 (currently 5.3% as against 7.8% at the end of 2007) while bond traders continue to bet on lower borrowing costs as India counters an economic slowdown following recessions in the US, Japan and Europe.

04:50

Weekend investing mantra

"For investment, the future is essentially something to be guarded against rather than to be profited from. If the future brings improvement, so much the better; but investment as such cannot be founded in any important degree upon the expectation of improvement." - Benjamin Graham

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